Illicit financial flows: HSBC case study
| Pages | 231-246 |
| DOI | https://doi.org/10.1108/JMLC-08-2015-0036 |
| Date | 08 May 2018 |
| Published date | 08 May 2018 |
| Author | Mohammed Ahmad Naheem |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
Illicit financial flows: HSBC
case study
Mohammed Ahmad Naheem
Mayfair Compliance, London, UK
Abstract
Purpose –This paper provides examples of how illicit financial flows (IFFs) are occurring through the
formal banking and financial servicessector. The purpose of this paper is to explore which elements of anti-
money laundering(AML) compliance need to be addressed to strengthenthe banking response and reduce the
impact of IFFs withinthe banking sector.
Design/methodology/approach –The paper uses a number of sources of secondary data including
the Swiss leaks data for HSBC and also the Permanent Sub Committee Report on HBUS in the USA, the
OECD report on money laundering compliance and Financial Action Task Force (FATF) guidelines on
beneficial ownership. It links this information to the relevant IFF reports produced through Global
Financial Integrity to highlight the connection between banking AML compliance and IFF transfers
through the banking sector.
Findings –The main findings from the analysisare that banks have a greater legal responsibilitytowards
detecting and reporting suspicioustransactions than they would have previously considered. This includes
identifyingthe source and purpose of fund transfers and establishing the beneficialownership of recipients.
Research limitations/implications –The research topic is new; therefore, analysis papers and other
academicwriting on this topic are limited.
Practical implications –The research paper has identified a number of implications to the banking
sector on addressing AML deficiencies, especially the need to improve standards of beneficial ownership
verificationand customer due diligence (CDD) checks forpolitically exposed persons.
Social implications –This paper has implications for the international development and the global
banking sector. It will also influence approaches to AML regulation, risk assessment and audit within the
broaderfinancial services sector.
Originality/value –The originality of this paper is the link between the HSBC cases and IFFs and the
implicationsthis will have for future AML compliance processesacross the banking sector.
Keywords Risk assessment, Money laundering, HSBC, Politically exposed persons,
Beneficial ownership, Illicit financial flows
Paper type Case study
Introduction
This paper focuses on the subject of illicit financial flows (IFFs), what they are and what
role, if any, the banking sector is playing, supporting or facilitating them. The paper then
considers how current anti-money laundering (AML) regulation and legislation can be
applied to IFF cases and how these casescompare to standard money laundering situations.
This paper has chosen as a case study the example of the HSBC Swiss Bank (ICIJ, 2015)
which was an item of media interestat the time and was chosen for this exercise for two key
reasons. Firstly, it is a case that had high media coverage and so many readers would be
aware of the details. Secondly, and despite the media profile, most of the coverage was
focused exclusively on the topic of tax evasion and the impact on developed economies of
unpaid taxes, from theseSwiss account holders. However what most media coveragedid not
focus on was the impact of the Swiss bank’s actions on globalinternational development. In
Illicit financial
flows
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Journalof Money Laundering
Control
Vol.21 No. 2, 2018
pp. 231-246
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-08-2015-0036
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1368-5201.htm
particular, there was little examination of the effect of IFFs on economies that were already
struggling to meet their public expenditure needs for health, education and other public
sector areas. If as media reports claim (ICIJ, 2015), Westerneconomies were denied millions
of dollars in unpaid taxes, what was the equivalent value of money denied to developing
countries and what impact would this money have had on weakened economies? To
understand this issue further, this paper explores how HSBC was connected to IFF monies
through certain clientsand then asks how this could have been preventedgiven the inherent
complexity of IFF transfers and these types of money laundering schemes. The paper
concludes by considering the global impact of this particular case and also other reports
recently released (OECD, 2014) that have been critical in their appraisal of the global
financial services sector and their compliance levels for money laundering risk assessment
generally.
HSBC Switzerland
The HSBC Swiss Bank case that was highlighted through the media, at the beginning of
2015 (ICIJ, 2015), raised a number of red flags regarding AML practiceswithin the banking
sector. One consequence of the weak AML systems meant that the banking sector was
playing a large role in supporting or facilitatingfinancial crime activities. The main focus of
the media reports in the HSBC Swiss case was on tax evasion and the loss of monies to EU
Governments and other developed economies. However the International Consortium of
Investigative Journalists (ICIJ) discovered through leaked data files that the Swiss HSBC
Bank had a number of clients who were residents of developing countries. These clients
were able to move money from developing economies into Switzerland andfrom there onto
offshore financial havens, thus depriving their own country’s development and hindering
aid and government assistance programmes within these countries (Julius Otusanya et al.,
2011). This paper seeks to determine how this was occurring and whatin the future can be
done to prevent it.
Money laundering regulation
International AML efforts began in the early 1970s as part of the war on drugs trade
(Durrieu, 2013). All banking institutions are subject to international AML requirements
which have been led by the UN and were initially focused solely on trying to curb the
prevalence of internationaldrug trafficking (Ryder, 2012):
The international community, led by the United Nations (UN), although heavily influenced by US
AML measures, introduced several legal instruments that criminalised drug money laundering,
permitted the confiscation of the proceeds of drug-related sales and sought to increase levels of
international cooperation (Ryder, 2012, p. 9).
One of the earliest pieces of AML legislation was developedin the USA in 1970[1]. This was
followed in 1988 with the first internationaltreaty involving money laundering as partof the
United Nations Convention against illicit traffic in narcotic drugs and psychotropic
substances[2]. Since then a number of legislative instruments have been brought into use in
countries across the globe (Ryder,2012) such as:
(1) Canada
Proceeds of Crime (Money Laundering) Act 1991;
Proceeds of Crime (Money Laundering) Act 2000;
Proceeds of Crime (Money Laundering) and Terrorist Financing Act 2001; and
Proceeds of Crime (Money Laundering) and Terrorist Financing Act 2006.
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